At the end of our career we want to enjoy a fulfilling retirement. To achieve that we need to plan ahead. We must save and invest to meet projected financial needs, and we must identify physical and intellectual activities to occupy our time productively. The focus of this chapter is on the former—the financial preparation (saving and investing) needed to achieve a dignified retirement.
As I’ve emphasized in earlier chapters, during our working years the objective is to accumulate diverse appreciating assets.
In retirement our objective shifts to ensuring we have adequate monthly income to meet our various needs.
These two objectives are related but not identical. For example, storing a collection of gold bars in a bank vault addresses our asset accumulation objective, but physical gold holdings don’t pay interest or dividends. In retirement we need steady cash flow, making gold impractical.
We’ll begin this chapter with a concept I call critical-mass principal. Subsequently, we’ll move on to cover: defined contribution and defined benefit retirement plans, 401(k), 403(b), and individual retirement accounts (IRAs), preparing for retirement, and tools such as budgets and forecasts to assess progress toward retirement goals.
For the sake of completeness, we’ll also cover Social Security benefits, although given the program’s precarious future I recommend ignoring it in your retirement planning.
The Great Retirement Unknown
If you’ve mastered budgeting and time value of money and you know the exact date at which you’ll die, retirement planning is a simple exercise: Simply build up a nest egg during your working years, draw it down in retirement, and die exactly when your net wealth equals zero. Economically, that represents blissful perfection.
The problem, of course, is that we don’t know when we’ll die. This underlying uncertainty makes planning for retirement more complex, in particular because we can’t afford to still be alive after our nest egg balance declines to zero. For low-earners this is a real concern. It is a sad reality for many elderly Americans who rely on Social Security to barely keep them above the poverty line.
Doctors, who typically earn above the 90th percentile, can avoid such a fate. But they must plan in advance to meet retirement goals.